Corporate governance in focus as divestmentgathers steam
NSUNDARESHASUBRAMANIAN
New Delhi, 2 October
State-owned electric utilities firm Powergrid Corporation is facing
the heat over validity of appointment of four directors — Ravi P
Singh, R P Sasmal, Santosh Saraf and Rita Sinha. According to proxy
advisory firm Stakeholders Empowerment Services (SES), the four
directors cannot continue since their appointments have not been
ratified by the shareholders in the recentlyconcluded annual general
meeting (AGM). "The continuance of these four directors in office is
not legally tenable," said J N Gupta, managing director, SES.
SES had flagged the issue in its report last month ahead of the AGM.
"Shareholders should note that four directors have been appointed
since the last AGM. Their appointment is not ratified by the
shareholders yet. Further, the company has not proposed any resolution
in the ensuing AGM for the same," the report said.
An email sent to Powergrid spokesperson did not elicit any response.
Powergrid is not alone. While investor scrutiny came as a natural
consequence of listing, it has intensified and attained activist
proportions ever since the second wave of divestment began in 2009.
More and more public sector units (PSUs) are facing closer scrutiny
from various sources such as institutional investors, proxy advisory
firms and even brokerages.
These 'activists' have sensitised the public sector firms to the
rights of minority shareholders, environmental, social and governance
issues, which were often ignored by the government.
In a recent survey by proxy advisory firm IIAS, top institutional
investors rated corporate governance in PSUs at 1.75 on a scale of
four. This was close to the score of promoterowned firms at 1.55.
Professionally managed companies and multinationals scored better at
3.17 and 3.67, respectively, pointing at a higher degree of corporate
governance.
As early as 2006, the giant California pension fund CalPERS decided it
will not invest in a few Indian companies, including ONGC with
operations in African country Sudan "until the government of Sudan
halts the genocide that has resulted in egregious human rights
violations".
Three years later, US investment bank Goldman Sachs published a
scathing report citing "serious governance issues" at ONGC. Goldman
Sachs said: "So far, ONGC's promoters (the government of India) have
taken cash of almost $20 billion from the company without consulting
the minority shareholders." The cash was used to subsidise the losses
of oil marketing companies such as Indian Oil, Hindustan Petroleum and
Bharat Petroleum, which sell — at the insistence of the government —
kerosene, cooking gas and diesel at subsidised rates.
ONGC's response to these two incidents showed a marked improvement.
In 2006, R S Sharma, then finance director of ONGC, was quoted as
saying, "We don't care if CalPERS will invest with us or not. We have
more than 300 FIIs (foreign institutional investors) as our investors.
We will continue operations in Sudan." In 2009, Sharma, by then
elevated to the position of chairman, gave a more benign response: "I
shared the concerns of this report. All the directors on the board
were with me," he said. But investors want more than just benign
responses as the government prepares to sell more ~30,000 crore worth
of PSU shares over the next few months.
In fact, even the boards of PSUs have become more conscious of
minority shareholder concerns. Recently, Coal India board refused to
toe the government line on pricing of coal after UK-based The
Children's Investment Fund (TCI) threatened to sue the directors for
breach of fiduciary duty.
The government of India owns 90 per cent in Coal India, while TCI owns
a little over 1 per cent. Coal India was listed on the bourses in
2010, after the government sold 10 per cent stake in an initial public
offering (IPO) to raise ~15,000 crore. SES further pointed out that
since the government of India, which is also the promoter, appoints
independent directors in the company, the government cannot really be
independent .
In the Powergrid case, SES said "Shareholders should note that
government of India is the promoter of the company. By allowing the
government to nominate all directors on board (including the
independent directors), control of the entire board is in the hands of
the promoter. We believe that such practices serve to increase the
control of the promoter over the company and may lead to oppression of
the rights of minority shareholders." In Coal India, the government
eventually used a provision to invoke the "Presidential directive",
wherein the President of India is authorised to direct a company to
act in a particular manner in the interest of public welfare.
According to M S Sahoo, a Mumbai-based advocate and a former Sebi
whole-time member, it is the ability of the government to 'overrule'
boards and regulators — sometime through legislations — that is
hampering any progress of PSUs in corporate governance. "If you are
able to extract preferential treatment, what is your incentive to
comply?" he asks.
State-owned companies already have a lower minimum public shareholding
norm of 10 per cent against 25 per cent for private sector firms.
Recently, the government got exemption from takeover regulations when
it acquired a majority stake in IFCI.
Sahoo says that the regulators are not enforcing the provisions of the
listing agreement strictly for the private sector companies as they
are afraid of being accused of double standards when the government
asks for a preferential treatment.
PSU firms more sensitive about investor issues than before, but a lot
to be covered GOVERNMENT V/S GOVERNANCE
|More PSUs facing questions on practices |Institutional investors seek
say in policy decisions |Independent directors, management are more
responsive |Government not fully ready to yield ground |Government's
ability to change rules of the game seen as hindrance
More and more public sectorunits are facing closerscrutinyfrom various
sources such as institutional investors, proxy advisoryfirms and even
brokerages
Private equity has a problem of plenty
ANDREW ROSS SORKIN
2October
It is a $1-trillion game: use it or lose it. The private equity world
is sitting on that 13-figure sum. It's what the industry calls dry
powder. If they don't spend their cash pile snapping up acquisitions
soon, they may have to return it to their investors. Nearly $200
million from funds raised in 2007 and 2008 alone needs to be spent in
the next 12 months or it must be given back.
Private equity executives, after spending the last several years
largely on the sidelines amid the economic uncertainty —often
proclaiming "patience" as an explanation — have begun to be anxious
that they may need to go on a shopping spree. At least two major
private equity firms, according to two executives involved in the
discussions, have held internal strategy sessions in recent weeks
about how to approach the looming deadline.
Some private equity firms have put the word out to Wall Street banks
that they want to go "elephant hunting" — seeking big deals worth as
much as $10 billion - and are willing to pay a special bounty for
bringing them acquisition targets.
At least one firm has gone so far as to begin contemplating asking its
investors, which include the nation's largest pension funds, to extend
the deadline for the money to be spent in return for certain
concessions on fees. (Of course, they don't return the fees that have
been collected thus far).
"The clock is ticking loudly for these funds," Hugh MacArthur, the
head of Bain & Company's private equity practice, wrote as the lead
author of areport on the state of the industry. So the race is on.
But, of course, there is a problem: "Burning off the aging dry powder
will likely result in too much capital chasing too few deals
throughout 2012," according to MacArthur.
That means it is possible we could see a series of bad deals with even
worse returns. Already, private equity firms have been quietly
spending lots of cash. In the third quarter alone, private equity
firms in the United States burned through $45 billion, up from $17.1
billion in the previous quarter, according to Capital IQ, which tracks
deals data. Carlyle Group, which had its initial public offering
earlier in May, has been the busiest firm this year: it has done 11
deals worth almost $12 billion.
Acquisition prices are also likely to balloon because of "lots of
firms bidding for the same obvious deals," Alastair Gibbons, a senior
partner at Bridgepoint Capital, told Triago, afund-raising services
firm that publishes a widely read quarterly newsletter. "Since there
is near record dry powder globally, it's entirely plausible that we'll
see increasingly overcrowded bidding processes." Richard Peterson, an
analyst for S&P Capital IQ's Global Markets Intelligence group, said
that private equity firms are already paying multiples of Ebitda —
earnings before interest, taxes, depreciation and amortization — of
10.6 this year, up from 10.3 last year. It's worth remembering that
many of the most successful deals in the private equity industry were
bought for six to eight times Ebitda, he said. He noted, however, that
since firms were able to borrow at unheard-of low rates today "it may
give them more confidence to pay a little bit more." Perhaps in a sign
of desperation, many private equity firms have been increasingly
engaged in a game of "hot potato" with one firm selling a business to
another — known as a secondary deal. Peterson said that at the current
pace, the industry was expected to spend a record-breaking $22.3
billion this year simply buying companies from each other rather than
buying businesses from the public markets or from private owners
outside the private equity industry.
©2012 The New York Times News Service LAZYMONEY
Private equityplayers have to invest$1 trillion as promised to return
itto investors
$200 mn
Funds have to invest in next 12 months alone or return to investors
2007 and 2008
When the money was raised
$10 bn and more
Deal size some private equity firms are eyeing
95%
Players may see big drop in fee income based on not investing committed capital
$22.3 bn
Marketreforms, agri debtwaiveron govtagenda
>ADITI PHADNIS & N SUNDARESHA SUBRAMANIAN
New Delhi, 2 October
Finance Minister P Chidambaram's visit to Mumbai, scheduled for
October 10-15, would primarily be aimed at reassuring foreign
institutional investors (FIIs) and sending a signal the government
isn't a greedy entity; it is ready to give, not just take.
The finance ministry announcement on reducing collateral for FIIs may
coincide with Chidambaram's visit. According to margining rules of the
Securities and Exchange Board of India, FIIs have to submit collateral
to cover the value of their trade. Currently, the entire collateral
has to be in cash and this locks up the funds for at least one trading
day. FIIs have demanded instruments such as government bonds, fixed
deposits, mutual funds and other approved securities be allowed as
collateral for trade in the Indian market.
To show sensitivity to states caught in the grips of a drought
(Maharashtra, Karnataka and Gujarat are the worst hit), the government
is also considering announcing adebt waiver scheme by the year-end.
However, it is hardly a coincidence that polls in Gujarat are slated
to be held at the end of this year, while elections Karnataka would be
held next year.
Considering the Gujarat and Himachal Pradesh assemblies must be in
place by January 15 2013, and the fact that the electoral process
takes about 45 days, bureaucrats and party managers expect elections
in these states in the first fortnight of December (around December 10
in Gujarat and December 15 in Himachal Pradesh). The Election
Commission is expected to issue a notification in this regard around
15 November. Importantly, once the model code of conduct kicks in, the
Centre and state governments can't announce any policy measure.
Before the Election Commission issues the notification, the government
could announce a debt waiver package. As a package of even ~10,000
crore could raise the fiscal deficit from 6.1 to 6.2 per cent, some
excise and disinvestment measures suggested by the Vijay Kelkar
committee---increasing excise on goods that attract six per cent
excise and do not affect public service to be increased to eight per
cent, and pruning the negative list of excise to include high-end
goods---might be accepted to allay expenditure worries and fend off a
ratings downgrade.
Analysts say data on gross domestic product, scheduled to be released
on November 30, is likely to show incremental improvement. This, along
with expectations the Reserve Bank of India may cut the repo rate on
October 30, would add to the perception the economy is stabilising.
Though there is no clarity on the timing of the winter session of
Parliament yet, the government would try to delay this as much as
possible. The winter session is usually held at the end of November.
However, in case electoral preoccupations are cited and the session is
shortened or held in 2013, it would result in a short window of
undisturbed decision-making for the government.
THE TO-DO LIST
|P Chidambaram's first visit to Mumbai as finance minister between
October 10 and 15 being sculpted to reassure foreign institutional
investors (FIIs) as part of Reassure India plan of the government
|FinMin's announcement on reduction of collateral for FIIs to coincide
with the FM's visit |According to Sebi margining rules, FIIs required
to submit 'collateral' to cover the value of their trades |Before the
Election Commission's notification, the government's debt waiver
package expected
Prime Minister Manmohan Singh ( left )with Senior BJP leader LK Advani
during a function on the occasion of Mahatma Gandhis 143rd birth
anniversary at Parliament House in New Delhi on Tuesday. PHOTO: PTI
--
.
-
CS A RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
Company Secretary, Chennai
email csarengarajan@gmail.com
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